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How the Brexit vote defeat impacts Australia

Summary: Australia's historic ties to the UK hardly obviate the scale of its interactions with the European Union, which is the country's second-largest trade partner. The defeat of PM May's Brexit bill only extends the uncertainty, as every option from here seems plagued by its own unique problems.

At this point, Brexit remains in a state of flux and none of the uncertainty has been removed. There are still many scenarios on the table and the week ahead will be messy and headline-driven.

It is likely that today's no confidence vote will fail. For Labour leader Jeremy Corbyn to win the no confidence vote he must rely on DUP and conservative rebel votes; Conservatives voting against May's deal is one thing, but sinking your own party is another. It seems one of the only things that conservatives agree upon is that a Corbyn government isn’t a favourable outcome.

But if in the unlikely event that a no confidence motion passes and we head towards general election, this would be sterling-negative.

Once the no confidence vote fails, we expect May’s government to turn to MPs to vote on possible paths, like whether to pursue a softer Brexit stance, possibly a Norway-style route, or how to protect from a no-deal outcome. With Parliament in control of Brexit, a cross-party compromise is likely to lead to a softer Brexit and veto the no-deal/crash-out option – which is more market-positive and one reason why sterling remains resilient at this stage.

While that remains a likely outcome, it is still unclear what will happen from here. It is hard to determine what the majority in Parliament actually is – it seems the only consensus is that May’s deal is a no-go, and that a no-deal Brexit must be avoided, but there is no idea of how to proceed. As long as the disorderly no-deal Brexit odds remain low, then we can avoid a sterling plunge and bleed into broader equity markets. The threat of a disorderly Brexit has decreased as such an outcome is not good for either side, and represents something that EU leaders and Britain will want to avoid.

While the EU seem to be playing hardball at the moment, it is likely negotiations will go right down to the wire before a last-minute compromise can be reached.

There is also the possibility of a second referendum, but we don’t view this as a likely option. While this is the outcome the markets would like and arguably the most economically robust and sterling-positive (depending on the question asked), it certainly is not an easy option to pursue. The market may be overestimating the likelihood of this outcome. The British public is not in support of a second referendum according to a YouGOV poll conducted Tuesday (8% say Yes) and Parliament cannot rebel against the peoples' vote and call a second referendum without risking civil insurrection and a wall of cynicism for British democracy.

If a second referendum was to be called, what would the question even be? We could debate this for days... would a no-deal Brexit be a voting option? Or would it be between Remain and May’s deal? Parliament reaching an agreement on this could take some time, let alone putting the rest of the referendum into motion, which could take several months.

Looking at the available pathways it looks like all roads lead to a delay of Brexit and extension of Article 50. This only serves to maximise the economic paralysis as businesses and consumers are stuck in limbo and unable to make decisions about the future.

For Australia, the final outcome will depend on the final deal between the EU and UK. The latest developments have not offered up any form of clarity on the final outcome, so at this stage the effects on global markets are muted, with the impact being felt in currency and UK markets. If anything, the uncertainty just adds to a long list of worries present at this stage. But Australian businesses with operations in the UK will not escape the economic uncertainties and inability to make decisions about the future that have arisen from political paralysis.

Exports are a key driver of GDP growth in Australia so maintaining trade agreements with both the UK and the EU will be a priority. The EU is Australia’s second-largest trading partner and largest source of foreign investment. Australia has started Free Trade Agreement negotiations with the EU, and it will be important for Australian interests to remain with the EU, being a 508 million-person export market.

Australia has a significant trade relationship with the EU, with exports valued at $20.3 billion in 2016 representing a 7.8% share of total Australian goods exports, not accounting for services. The decision to begin negotiations on an FTA with the EU reflects that strong relationship and should remain a priority.

In the event of a no-deal Brexit, opportunities could arise for Australia whereby an FTA agreement may be negotiated with the UK. This could potentially provide more favourable terms of trade and increased exports to UK for Australia. But it must be remembered that in the event of a no-deal Brexit, the negative demand-side impact and ensuing contraction in the UK economy could outweigh the positives of the free trade deal for Aussie exporters, at least in the short term.

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